Working Paper: CEPR ID: DP2997
Authors: Enrique Sentana
Abstract: In this Paper, I first provide a simple unifying approach to static Mean-Variance analysis and Value at Risk, which highlights their similarities and differences. Then I use it to explain how fund managers can take investment decisions that satisfy the VaR restrictions imposed on them by regulators, within the well-known Mean-Variance allocation framework. I do so by introducing a new type of line to the usual mean-standard deviation diagram, called IsoVaR,which represents all the portfolios that share the same VaR for a fixed probability level. Finally, I analyse the 'shadow cost' of a VaR constraint.
Keywords: Market Risk; Capital; Portfolio Frontier; Risk Management
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fund managers can achieve compliance with VaR constraints (G11) | Fund managers can make investment decisions that comply with VaR restrictions (G11) |
| Portfolios selected by fund managers (G11) | Ability to meet regulatory VaR requirements (G18) |
| Mean-variance portfolio allocation principles (G11) | Compliance with VaR constraints (C58) |